Regulators, consumers and investors are increasing the pressure on businesses to accelerate efforts to make their operations more sustainable. The focus is expanding to include suppliers, as their environmental impact and labor standards weigh on the whole of any company’s sustainability footprint.
Legal teams are in an ideal position to help strengthen the strategies, policies and processes that govern supply chain relationships. General Counsel and their legal departments can play a key role in helping organizations stay a step ahead of these regulatory changes and reduce potential risks. Legal teams typically have connections across the major functions in the business and have a strong understanding of how various factors will impact the business. They also understand the current and evolving regulatory environment and are experienced in considering the potential future impact of decisions made today. Moreover, they tend to be responsible for or at least carry significant influence over the contracts governing the relationship between an organization and its supply chain.
But meaningful change in the supply chain evolves slowly even as sustainability demands are accelerating, and potential risk is growing. The time for General Counsel to act is now.
The rise of third-party sustainability risk
For many organizations, supply chain redesign and transformation were underway well before the Covid-19 pandemic but it became a more visible priority as lockdowns led to shortages, stockouts and workarounds. Coinciding with this trend is a shift in mindset among consumers, investors and regulators, who are holding organizations accountable for the sustainability practices of their suppliers.
The growing focus on supplier sustainability creates a wide range of risks for corporations. Consumers are demanding that organizations back up their sustainability ambitions with clearly defined actions and greater transparency. Meanwhile, investors are increasing the level of due diligence they perform on organizations’ supply chains to validate the overall sustainability of the organizations they lend to and invest in. Ultimately, consumers and investors are placing pressure on organizations by voting with their wallets, causing both financial and reputational risk.
At the same time, regulators are proposing and enacting new regulations and reporting guidelines that formally extend organizations’ legal obligations to include issues related to their supply chains. A prominent example of the new rules being enacted is the EU’s Green Deal, which proposes to hold companies responsible for human rights or good governance violations and harm to the environment within their supply chains. While some of these rules are being implemented on an EU-wide basis many are being rolled out at a country level. Other jurisdictions, including Germany, France and California have issued their own similar, or more stringent, regulations governing supply chains, adding to the growing complexity of the regulatory environment that organizations must navigate.